Life Contingencies – Are you prepared? [Part II]

This is in continuation to my first article on life contingencies. To read, click here

Now that we are aware of the contingencies, let’s talk about our preparation.

What should be the quantum of life insurance cover one should take?

The sum assured or risk cover has to be adequate, whether taken from the same insurance company or multiple. This means, if my husband dies tomorrow, my kids and I should get an amount that will compensate our living expenses for the future that we have to face without him. If it means paying a higher premium, then so be it. The times of joint family support system are over. I will not like the idea of being dependent on others, in case the situation arises.

The thumb rule for the quantum is: Take 10 times the annual income of the primary bread earner – in my case ie my husband, and add all your liabilities like loans, credit card outstanding etc. to that. Deduct all your assets, but don’t include personal assets like the house you live in, the car you drive or jewellery etc as ideally you will still need and use these. Finally, deduct the Sum Assured of your existing insurance policies to get the final figure.

The other way to calculate is by taking the annual expenses as the starting point. Deduct 10% as personal expenses of the insured life. Multiply this balance by 16. Add all your existing liabilities. Deduct all your assets but not personal assets and again, deduct the Sum Assured of your existing policies to get to the final figure.

The final figure in both the calculations will give you a rough estimate of the family’s living expenses that need to be covered. But what about the goals?

You need to add the monetary value of all your future goals like kids education, funds for marriage etc to this figure to come to the right amount of insurance cover that one should have. I definitely want to see my kids go through the schooling my husband and me have dreamt for them irrespective of either one of us being alive!

If you are not so sure on the calculations, it is a good idea to consult a financial planner to review your insurance needs. A financial planner would take inflation, life span, commercial value of assets, spouse income etc into account in calculating a more realistic picture of your insurance needs.

Take a term insurance plan. Most people never buy a simple term insurance plan simply because they don’t get any money back if they live. What they don’t understand is that term insurance is the cheapest way of ensuring that if you die, your family gets something – this is called risk cover. The premium you pay is way cheaper than any insurance plan where you get back something during or at the end of the term.

Do I need insurance in my name?

Very few women think of their lives as insurable or what would happen if they were to fall prey to illhealth. It could be true that their share of the family income could be less than half their husband’s – but if this small percentage of income were not there, a number of goals planned may not be achievable. Even homemakers can take life insurance policies, both term and savings linked policies with certain limitations on the sum assured. You are definitely irreplaceable (maybe something to be happy about!) but let’s be practical. In your absence, extra help will be needed for the smooth running of your household. This can be a financial drain for your family.

Any woman, professional or homemaker should have health or medical insurance. With the kind of lifestyle diseases one can encounter these days, if you were to fall sick requiring hospitalisation, your family might be faced with heavy medical bills. These days medical insurance is usually a part of the benefits one receives from the employer, but there is no harm in taking an additional policy independently. It takes care of any emergencies during the transition from one job to another. Further with medical insurance premiums on the rise, employers may be of a mind to reduce/remove this benefit in the future. There is also an added advantage of tax deduction under Section 80D for medical insurance premium paid upto Rs.15,000/- p.a. So whether you are offered medical insurance by your employer or covered under your husband’s medical benefits, you should consider taking a policy independently as well. The younger you are, the easier it is to get health insurance as you are still healthy!

I would like to reiterate – Take insurance when you can and not when you need it!

[Image Courtesy: confusion.com]